Ind AS 115 | Transaction Price in Govt Contracts with Renegotiation

1. Facts

Tech-Serve Solutions Limited (hereinafter referred to as “the Company”) provides integrated software implementation and annual maintenance services to corporate customers. During the financial year, the company entered into a contract with “Metro Infrastructure Authority”, a government-owned entity, to implement a customised enterprise management system, including one year of post-implementation support.

The total contract price is ₹12,00,000, payable within 60 days of installation. The company has historically entered into similar contracts with government and quasi-government customers. Although contracts specify fixed pricing, past experience indicates that final settlement amounts are frequently renegotiated due to budgetary approvals and administrative delays. In several previous contracts with similar customers, the company accepted reduced payments to secure timely collection. For the current contract, management expects to agree to a reduction of approximately ₹3,00,000 during settlement negotiations, based on past practice.

The company completed the installation of the system and raised an invoice for the full contractual amount. The contract price reflects the company’s standard pricing structure, and the company does not ordinarily offer post-sale discounts at contract inception.

However, Metro Infrastructure Authority is currently facing financial constraints and has a history of delayed payments to vendors. While the customer has acknowledged the liability, payment remains outstanding at the reporting date. Based on past recovery experience with financially stressed government customers, the company estimates that approximately 20% of receivables from such customers may ultimately not be recovered due to collection risk rather than pricing adjustments.

How should the company determine the amount of revenue to be recognised at the time of software implementation under Ind AS 115, particularly in assessing whether the expected reduction in consideration represents an implicit price concession affecting the transaction price or a credit loss to be recognised separately?

2. Relevant Provisions

Ind AS 115 – Revenue from Contracts with Customers

Para 9(e) of Ind AS 115

An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

…

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession.

Para 51 of Ind AS 115

An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event.

Para 126AA of Ind AS 115

An entity shall reconcile the amount of revenue recognised in the statement of profit and loss with the contracted price showing separately each of the adjustments made to the contract price, for example, on account of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, etc., specifying the nature and amount of each such adjustment separately.

Para 107 of Ind AS 115

If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. An entity shall assess a contract asset for impairment in accordance with Ind AS 109. An impairment of a contract asset shall be measured, presented and disclosed on the same basis as a financial asset that is within the scope of Ind AS 109.

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